Union Pacific Railroad v. Certain Underwriters At Lloyd's London

August 5, 2009

UNION PACIFIC RAILROAD AS SUCCESSOR-IN-INTEREST TO THE CHICAGO AND NORTH WESTERN RAILWAY COMPANY, PLAINTIFF AND APPELLANT,v.CERTAIN UNDERWRITERS AT LLOYD'S LONDON, ET. AL., INCLUDING CONTINENTAL CASUALTY CO., DEFENDANTS AND APPELLEES.

APPEAL FROM THE CIRCUIT COURT OF THE THIRD JUDICIAL CIRCUIT BEADLE COUNTY, SOUTH DAKOTA HONORABLE JON R. ERICKSON Judge.

The opinion of the court was delivered by: Von Wald, Circuit Judge

ARGUED APRIL 29, 2009

[¶1.] Union Pacific Railroad (UP) brought suit seeking recovery from its insurance carrier for the cleanup of a contaminated site located in Huron, South Dakota. Continental Insurance Company (Continental) moved for summary judgment on the grounds that the railroad did not provide timely notice of the loss and that Illinois law governed, under which to prevail the insurer is not required to show the untimely notice caused prejudice. The circuit court agreed and granted Continental summary judgment. We affirm regarding the lack of notice and conclude that a determination of which state's law applies is not necessary because the railroad is not entitled to relief under either state's law.

FACTS AND PROCEDURE

[¶2.] In 1910 Chicago & North Western Railway Company (C&NW) constructed a roundhouse on property it previously acquired in Huron, South Dakota. Between 1910 and 1986, C&NW used the roundhouse as a service and repair facility for locomotives. Beginning in the 1950s through 1986, C&NW also conducted refueling operations at the roundhouse.

[¶3.] Around the same time the roundhouse was constructed, C&NW built a system for phase separation and disposal of waste generated by the roundhouse. This system consisted of three separation ponds connected to the roundhouse and to each other by underwater pipes and storm sewers. The ponds allowed oils to rise to the surface while allowing heavier sediments and contaminants to settle to the bottom.

[¶4.] During heavy rains or when large volumes of waste water entered the ponds, the water from the waste disposal system would sometimes overflow into a drainage ditch located on the north side of the ponds that connected to Ravine Creek. Ravine Creek emptied into the James River near the City of Huron's drinking water intake point.

[¶5.] C&NW obtained excess liability policies at issue in this matter from Continental for the years of 1958 to 1961, 1961 to 1964, and 1964 to 1967. Each policy provided coverage for losses in excess of $500,000 and contained the following provision:

The Insured shall give written notice to the Company of any loss and, as soon as practicable after the loss, the Insured shall render to the Company a proof of loss, signed and sworn by the Insured. The Insured, as often as may be reasonably required, shall submit to examinations under oath by any person named by the Company and shall subscribe the same; and, as often as may be reasonably required, shall produce for examination all books of account, bills, invoices and other vouchers, or certified copies thereof if original be lost, at such reasonable time and place as may be designated by the Company or their representatives, and shall permit extracts and copies thereof to be made.

[¶6.] In 1962 the waste discharges from the roundhouse were causing problems at the City of Huron Water Treatment Plant. C&NW constructed a dike between the area north of the roundhouse and the drainage ditch bordering the property. It also modified plumbing of the ponds adjacent to the dike.

[¶7.] In 1986 C&NW sold the property in Huron to Dakota, Minnesota, & Eastern Railroad Corporation (DM&E), but retained responsibility for existing environmental contamination. In 1990 C&NW established $500,000 in environmental reserves for the potential remediation of pollution at the Huron site.

[¶8.] On February 15, 1994, the United States Environmental Protection Agency (EPA) notified C&NW through a Notice of Potential Liability (PRP Notice) that C&NW would be held responsible for the cleanup of environmental contamination at the Huron site. The PRP Notice stated, "[i]f you are insured for any damages resulting from the release of hazardous substances, pollutants, and/or contaminants and have not already done so, we suggest that you inform your insurance carrier that EPA has spent and is considering spending additional public funds to investigate and/or control releases at the Site."

[¶9.] C&NW decided to voluntarily undertake the cleanup of the Huron site because the EPA threatened to perform the cleanup and seek reimbursement from C&NW. In 1995 UP purchased all of C&NW's assets and assumed its environmental obligations. UP entered into a cost sharing agreement with DM&E wherein UP would cover 90 percent of the costs of the investigation and cleanup. In June 1995 an Administrative Order of Consent (AOC) was sent by the EPA to UP to formalize UP's acceptance of liability for the Huron site. UP, DM&E, and the EPA negotiated the terms of the AOC and finalized it on August 28, 1996. Between 1995 and September 1997 UP entered into contracts with consultants and contractors for the cleanup of the site. In late 1997 cleanup of the site was substantially completed, with some monitoring continuing today.

[¶10.] On September 18, 1997, after substantially completing the cleanup, UP notified Continental of its liability for the Huron site. UP has stated that the timing of its notice reflected that UP and Continental and other insurers had been engaged in similar lawsuits over environmental property damage insurance coverage in which Continental and the other insurers had refused to pay. At the time UP notified Continental of the liability over $5,000,000 had been spent remediating the site to excavate the contaminated soil, empty and treat the polluted pond water, fill in the ponds with clean soil, plant grass where the ponds formerly were, and to remove all of the plumbing from the roundhouse and between the ponds. All that remained to do was monitor the groundwater at the site.

[¶11.] On September 26, 1997, Continental responded to UP's notice with a letter informing UP that it was attempting to obtain the policies at issue here, reserving its rights under the policies, and asked for UP's help in its investigation of the claim. Continental requested:

1. Copies of any and all correspondence and documentation received from, or sent to any party or government agency relative to Union Pacific's involvement at the referenced sites.

2. Copies of any and all correspondence and documentation relative to how and when pollutants were discharged at the sites, and relative to how and when the alleged contamination transpired.

3. Copies of any and all correspondence and documentation UP believed indicated that "bodily injury" and/or "property damage," if any, transpired during the [Continental] policy periods.

4. Copies of any and all correspondence and documentation regarding any investigations and remedial measures relative to the sites.

5. Any other details or documentation that may assist [Continental] in the evaluation of these claims.

When UP failed to respond to Continental's letter, Continental sent four additional letters again requesting the information. The additional letters were sent on November 14, 1997, February 9, 1998, August 14, 1998 and finally January 25, 1999. The letter dated January 25, 1999, was titled "Fifth and Final Request" and informed UP that if it did not respond within thirty days, Continental would assume that coverage was no longer being ...

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